Trading Commission
Trading Commission
Quick Definition
A trading commission is a fee paid to a broker for executing a securities transaction — buying or selling stocks, ETFs, options, or other securities. Historically charged per trade ($5-$30 at discount brokers; $100+ at full-service brokers), trading commissions were largely eliminated by major US online brokers in October 2019, transforming retail investing economics.
What It Means
For decades, trading commissions were a significant friction in retail investing. A small investor making monthly $500 purchases and paying $10/trade had a 2% immediate drag on each investment. This made frequent investing — including dollar-cost averaging — expensive, and discouraged rebalancing.
The commission-free revolution that swept US brokers in 2019 (triggered by Charles Schwab's announcement on October 1, 2019) fundamentally changed retail investing: it enabled fractional shares, eliminated the cost penalty for frequent small investments, and powered the rise of zero-cost index investing.
The Commission Elimination Timeline
| Date | Event |
|---|---|
| Pre-1975 | Fixed commission rates mandated by NYSE — often hundreds of dollars per trade |
| May 1, 1975 ("May Day") | SEC deregulated commissions; discount brokers emerged |
| 1980s-2000s | Discount brokers: $15-$30/trade; full-service: $100-$250/trade |
| 2000s-2010s | Online competition drives discounters to $7-$10/trade |
| 2013-2019 | Robinhood launches $0 commission; others maintain $5-$10 |
| October 1, 2019 | Schwab eliminates commissions → domino effect industry-wide |
| 2020-present | Virtually all major US brokers: $0 for stocks and ETFs |
Current Commission Structure at Major US Brokers (2024)
| Broker | Stock/ETF Commission | Options Commission | Notes |
|---|---|---|---|
| Fidelity | $0 | $0.65/contract | No account minimum |
| Charles Schwab | $0 | $0.65/contract | No minimum |
| TD Ameritrade (Schwab) | $0 | $0.65/contract | Merged with Schwab |
| Vanguard | $0 | $1.00/contract | Long-standing low-cost leader |
| E*TRADE | $0 | $0.65/contract | 30+ trades/quarter: $0.50 |
| Robinhood | $0 | $0 | No per-contract fee |
| Interactive Brokers | $0 (IBKR Lite) / $0.005/share (Pro) | $0.65/contract | Pro for active traders |
| Merrill Edge | $0 | $0.65/contract | Bank of America integration |
How Brokers Make Money Without Commissions
If commissions are $0, how do brokers survive? Several revenue streams replaced commissions:
| Revenue Source | Description |
|---|---|
| Payment for order flow (PFOF) | Market makers pay brokers to route retail orders to them; most controversial |
| Net interest income | Brokers earn spread on cash balances, margin lending |
| Securities lending | Lending client shares to short sellers for a fee |
| Premium services | Advanced trading platforms, margin accounts, premium research |
| Advisory fees | Managed portfolios and financial planning |
| Mutual fund revenue sharing | Some fund families pay for shelf space on broker platforms |
PFOF controversy: Critics argue PFOF means orders are executed at slightly worse prices for retail investors, creating a hidden commission. The SEC proposed eliminating or restricting PFOF in 2022-2024 — debate ongoing.
Where Trading Commissions Still Apply
| Security Type | Commission Status |
|---|---|
| US stocks (exchange-listed) | $0 at most major brokers |
| US ETFs | $0 at most major brokers |
| Options | $0.50-$0.65/contract (per option contract, not per trade) |
| Mutual funds (NTF — no transaction fee) | $0 |
| Mutual funds (transaction fee) | $0-$49.95/transaction |
| Bonds (secondary market) | Mark-up embedded in price; not transparent |
| International stocks | $0-$50 depending on market/broker |
| OTC stocks (pink sheets) | Sometimes charged |
| Futures | $0.25-$2.25/contract |
| Cryptocurrencies | 0.50-2.50% spread or fee |
Options Trading Commissions
Options still carry per-contract fees at most brokers:
| Broker | Per-Contract Fee | Notes |
|---|---|---|
| Robinhood | $0 | Industry disruption in options too |
| Schwab, Fidelity, TD | $0.65 | Standard rate; buy 10 contracts = $6.50 |
| Interactive Brokers Pro | $0.25-$0.65 | Volume discounts available |
| Tastytrade | $1.00 to open, $0 to close | Options-focused broker |
A typical 10-contract options trade at $0.65/contract costs $6.50 — still meaningful for frequent options traders.
The True Cost of "Free" Trading
Zero commissions do not mean zero transaction costs:
| Hidden Cost | Description |
|---|---|
| Bid-ask spread | The gap between buy and sell price; always present; market makers profit from it |
| Market impact | Large orders move prices against the trader |
| PFOF-related execution quality | Some evidence of slightly worse fill prices vs. lit exchanges |
| Behavioral costs | Zero commissions enable overtrading; more trades usually means worse returns |
Research shows that commissions were never the primary cost for passive, long-term investors — bid-ask spreads and behavioral errors were always larger. The zero-commission era primarily benefits active traders and frequent small investors.
Key Points to Remember
- Trading commissions at major US brokers are $0 for stocks and ETFs since 2019
- Options still cost $0.50-$0.65 per contract at most brokers
- Brokers replaced commission revenue with PFOF, net interest, and securities lending
- Zero commissions enabled fractional shares and cost-free rebalancing
- The true cost of trading includes bid-ask spreads, not just explicit commissions
- Zero commissions have increased trading frequency — usually not beneficial for investor returns
Frequently Asked Questions
Q: If commissions are $0, why should I care about trading costs? A: The bid-ask spread remains a real cost — on illiquid stocks or during volatile markets, spreads can be 0.10-1.00% of the trade value. For frequent traders, these costs compound significantly. For long-term buy-and-hold investors in liquid index ETFs, bid-ask spreads are minimal (often 0.01%) and trading costs are genuinely near-zero. The bigger risk of zero commissions is behavioral — they remove friction that previously discouraged overtrading.
Q: What is payment for order flow? A: Payment for order flow (PFOF) is when a market maker (like Citadel or Virtu) pays a retail broker (like Robinhood or Schwab) for the right to execute retail customer orders. The market maker profits from the bid-ask spread on each trade. The debate: does PFOF give retail investors better or worse prices than routing to exchanges directly? The SEC has proposed reforms; the debate remains unresolved.
Q: Do robo-advisors charge trading commissions? A: No — robo-advisors like Betterment and Wealthfront buy and sell ETFs on your behalf at zero commission. The robo-advisor's advisory fee (0-0.25%) covers all trading activity. Within a robo-advisor account, rebalancing and tax-loss harvesting generate no additional trading costs.
Related Terms
Transaction Fee
A transaction fee is a one-time charge applied when buying or selling certain mutual funds through a brokerage platform — distinct from trading commissions on stocks, it compensates the broker for processing fund transactions outside their no-fee fund network.
Custodial Fee
A custodial fee is a charge for safekeeping and administering securities held in an investment account — covering record-keeping, account statements, and regulatory compliance, though most major retail brokers have eliminated these fees for standard accounts.
Wrap Fee
A wrap fee is a single all-inclusive annual charge that bundles investment management, brokerage commissions, and advisory services into one fee — typically 1-3% of assets — simplifying billing but potentially costing more than unbundled alternatives.
Margin Trading
Margin trading is borrowing money from a broker to purchase securities, amplifying both potential gains and losses — requiring a margin account and subjecting investors to margin calls if the account value falls below required minimums.
Broker
A broker is a licensed intermediary who executes buy and sell orders for securities, real estate, or other assets on behalf of clients, earning a commission or fee for the service.
10-K
A 10-K is the comprehensive annual report publicly traded companies must file with the SEC, containing audited financials, risk factors, and management's full analysis of business performance.
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